The Latest Information on the ERTC
Last Updated June 24, 2022
On June 22, the IRS Tax Advocate issued its mid-year report to Congress, which found that the IRS had a backlog of 21.3 million unprocessed paper tax returns, which is an increase of 1.3 million over the same time last year.
According to the report, in May 2021 there were 20 million paper tax forms awaiting processing by the IRS, including 6.1 million paper business tax returns. In May 2022, there were 21.3 million paper tax forms awaiting processing, including 7.4 million business returns. The amended business paper tax return backlog increased by 400,000, from 500,000 in 2021 to 900,000 in 2022.
These delays were not unexpected by us. For more than two years, we have been pushing both the IRS and Congress to put additional resources into the IRS to process the 941-X so that PEO clients could receive this credit in a timely manner.
Most recently, we asked the IRS to create a “1-800” number for PEOs to call to determine the status of their 941 filings and any Form 941-Xs filed by the PEO on behalf of their clients. We also asked that a dedicated team be created within the IRS to clear out the backlog of PEO ERTC filings, and for the IRS to put procedures in place to ensure that ERTC tax credits claimed by PEO clients are properly remitted to those clients.
The IRS claims that they will eliminate the backlog by the end of this year. For many of your clients – some who have waited more than a year for their ERTC payment – this further delay is unacceptable. We have drafted a letter you can send to your clients who have yet to receive their ERTC. The letter can also be used as talking points in case a client calls and wants to know why their ERTC has been delayed for so long. In addition, we had our outside counsel Davis & Harman draft a memo explaining why these credits are delayed.
We continue to pound away on Congress and the IRS to put the necessary resources into clearing out the backlog of 941-X forms. They are making progress but we will not stop until this backlog is eliminated.
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You are also encouraged to join our member forum discussion group on the ERTC to engage with fellow members. For more information contact Thom Stohler.
Member Resources:
NAPEO Efforts on the ERTC
- May 29, 2020 – email to Kathy Stroub, the IRS Director of the CPEO program, regarding complexity of 941 filings with new payroll tax credits, Form 7200;
- July 1, 2020 – letter to Carol Weiser and Vicki Judson following up to 5/29/2020 NAPEO email;
- March 8, 2021 – call with Treasury/IRS to discuss retroactive changes to ERTC;
- March 17, 2021 – letter to the Secretary of the Treasury Janet Yellen and the IRS Commissioner Charles Rettig from NAPEO and three other trade associations (American Payroll Association, U.S. Chamber of Commerce, and American Institute of CPAs) to put more resources into processing ERTC claims;
- May 7, 2021 – letter to IRS Counsels Rachel Levy and Janine Cook regarding 941-X, ERTC;
- April 7, 2022 – letter to Sec. Yellen and Comm’r Rettig regarding 941/941-X delays, ERTC, and offsets
- April 26, 2022 – Hill meeting with Senate Finance Committee staff to discuss ERTC delays and incorrect processing of tax credits taken by PEO clients;
- April 27, 2022 – Hill meeting with House Ways and Means Oversight Subcommittee staff, to discuss ERTC delays and incorrect processing of tax credits taken by PEO clients; and,
- May 17, 2022 – Hill meetings NAPEO members met with 35 representatives and Senators to discuss the problems with the IRS processing Form 941-X and the harm this delay is causing their small business clients.
IRS Guidance:
Background
The ERTC was created by the CARES Act in March. It was extended and modified by the Consolidated Appropriations Act of 2021. Here’s how that law modified the ERTC.
- Repeals the provision denying the ERTC to employers receiving a PPP loan. Instead, mechanisms would be created to prevent the same wages from being used for both PPP loan forgiveness and the ERTC.
- Extends the ERTC to apply to wages paid before July 1, 2021 (instead of January 1, 2021).
- Increases the credit percentage from 50 percent to 70 percent of applicable wages.
- Increases the per-employee limitation on applicable wages from $10,000 total to $10,000 per calendar quarter. In combination with the increased credit percentage, this would increase the maximum credit per employee from $5,000 to $7,000 per quarter (up to $14,000 for the first two quarters in 2021).
- The following language was added to the ERTC provisions that specifically addresses PEOs:
Any forms, instructions, regulations, or guidance described in paragraph (2) shall require the customer to be responsible for the accounting of the credit and for any liability for improperly claimed credits and shall require the certified professional employer organization or other third-party payor to accurately report such tax credits based on the information provided by the customer. [Emphasis added.]
It is not clear whether this provision applies retroactively or just to new credits taken in 2021.
- Makes the ERTC available if the business experienced a decline of at least 20 percent in gross receipts (instead of a 50 percent decline) as compared to the same calendar quarter in the prior year.
- Modifies the small employer definition of qualified wages to apply to employers that have 500 or fewer employees (instead of 100 of fewer employees).
The ERTC was modified again in March 2021 by the American Rescue Plan Act, which, among other changes, added the ERTC to the Internal Revenue Code (§ 3134) and extended it to Q3 and Q4 2021. As noted above, The Infrastructure Investment and Jobs Act (IIJA), which was signed into law on November 15, 2021, retroactively terminated the ERTC one quarter early for most employers so that the ERTC is generally not available with respect to wages paid on or after October 1, 2021. Employers that meet the definition of “recovery startup business” in Code § 3134, as amended by the IIJA, continue to be eligible to claim the ERTC for wages paid through December 31, 2021.
Employers that are no longer eligible for the ERTC in Q4 2021 but that (1) received an advance payment of the ERTC for Q4 using Form 7200 and/or (2) reduced their payroll tax deposits earlier in Q4 in anticipation of claiming the ERTC for Q4 should review the guidance in Notice 2021-65 (see link above) for information regarding repayment of those amounts.
The Infrastructure Investment and Jobs Act (Public Law 117-58) contains a provision that ends the Employee Retention Tax Credit (ERTC) at the end of the third quarter of 2021. Most employers should not claim any ERTC on the Form 941 for Q4 2021, with one exception for a “recovery startup business.” Employers that meet that definition could still claim the ERTC for Q4 2021 (if otherwise eligible).
Employers may continue to claim the ERTC for Q1-Q3 2021 if they are eligible.